City Union Bank - Management Meet Note - Dolat Capital

Followings are the key takeaways on City Union Bank's (CUB) management meet:

The bank's management expects business to grow at 25-30% CAGR by end-march'15; CUB's credit book would expand to Rs.300-350bn and deposits would grow to Rs 500bn. During FY12-15, the bank would need to raise ts 10bn of equity. The bank has already received a board approval to raise equity capital of Rs.4bn from right issue; the bank is also exploring other alternatives to raise equity capital.

The bank's management does not foresee any significant change in credit portfolio composition going forward; retail trade, whole-sale trade and SME would remain mainstay for expanding credit book. On sector-wise exposure front, the bank is mainly exposed to textile and Iron & Steel. For southern states textile units, main concern has been power cuts and recent developments on pollution front in Tirupur.

Some of the smaller ticket size loan accounts saw a shift from state-owned banks to smaller private sector banks; CUB is also one of the gainers out of the shift.

CUB's deposit mobilization would be mainly supported by branch expansion. CUB's CASA share remains under pressure due to hike in saving deposit rate hikes by various new-generation private sector banks. It is expected that the CASA share would remain under pressure due to rising competition, though new branch expansion and setting-up of new off-site ATMs would aid saving deposit mobilization and also contain deposit transaction cost.

On fee income front, the bank's management expects that core fee income would grow in-line with credit growth. Other component (like treasury income) of 'Other income' would remain volatile in-line with interest rate movement. The bank's management expects recovery on written-off accounts (accumulated written-off accounts of Rs.750mn - 10bn) to remain strong. On wealth management services front, the bank's management does not sound very aggressive.

On operating expenses and employee retention fronts, the management stated that a bank's employee gets gratuity, pension (defined benefit plan) benefits apart from ESOPs and biannual ex-gratia payments. CUB's employee structure does not follow IBA's pattern and has its own remuneration policy. CUB's attrition rate has remained quite low; it had touched a peak during mushrooming of BPO companies. CUB's employee average age is around 30-35 years.

Overall, the bank's management expects robust business growth to continue though margin could be under strain mainly due to pressure on CASA share and declining trend in interest rate cycle; almost 80% of the bank's credit book is on floating rate basis. The bank's management does not expect any pressure on asset quality front.

Our earning model factors in 26% CAGR growth in business volume in FY13-14 with slight reduction of 25bps (YoY) in margin in FY13. We maintain our earnings estimates for FY13 and introduce FY14 earnings estimates and rollover our target price on FY14's estimates. We upgrade our stock rating to BUY (from previous Accumulate rating) with a target price of Rs.60 at 1.45x adjusted book value FY14.

Source : Equity Bulls

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